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Amendments to IFRS 17 'Insurance Contracts'

Date recorded:

Summary of the Transition Resource Group for IFRS 17 Insurance Contracts (Agenda Paper 2A)

This paper provided the Board with an update on the discussions of the Transition Resource Group for IFRS 17 (TRG) meeting held on 4 April 2019.

Please see Deloitte’s IFRS in Focus for a summary of the meeting.

Agenda Paper 2B contains the TRG submissions log as at 22 March 2019.

There was no discussion on these papers.

Sweep Issues (Agenda Paper 2C)

Background

In this paper, the staff discusses issues for the Board to consider before finalising the ED that are consequential to issues that the Board has previously discussed. Those issues are:

A—Investment-return service

The Board previously tentatively decided that in the general model the contractual service margin (CSM) is recognised in profit or loss on the basis of coverage units that are determined by considering both insurance coverage and investment-return service. The Board also decided that an investment-return service can exist only when an insurance contract includes an investment component.

However, the staff have analysed subsequently that an investment-return service might be provided in insurance contracts that do not include an investment component. This is the case when a policyholder has a right to withdraw amounts from the entity, for example the policyholders’ rights to a surrender value or premium refund on cancelling the policy.

Staff recommendation

The staff recommended the Board revise its tentative decision to establish in IFRS 17 that an investment-return service exists only when an insurance contract includes an investment component, to instead specify that an investment-return service exists if, and only if:

  1. There is an investment component, or the policyholder has a right to withdraw an amount
  2. The investment component or amount the policyholder has a right to withdraw is expected to include a positive investment return
  3. The entity expects to perform investment activity to generate that positive investment return

Board discussion

The Board members generally supported the staff recommendation, however some of the Board members were struggling with the notion of a “positive” investment return as mentioned in criterion b) and c) above. In the Board members’ view, it was not entirely clear whether ‘positive’ would mean ‘above zero’ or ‘above the market interest rate’. In a negative interest rate environment, a return could be perceived as positive if it was less negative than the market return. The staff replied that they had given this some thought, but decided not to propose additional guidance. When the Vice Chair proposed to add some explanation to the Basis for Conclusions (BC) on the amendments, some Board members were still not satisfied as the BC is not part of the mandatory guidance. The Vice Chair then proposed to add guidance to the main body of the Standard and its (mandatory) application guidance.

Board members emphasised that the criteria a) to c) above should be necessary but not determinative criteria for an investment-return service. They also generally agreed that the weighting between investment-return service and insurance service should remain a matter of judgement and not be mandated by the Standard. There was agreement that this amendment would not unduly disrupt implementation processes already underway, as many stakeholders have raised this issue with the staff and Board members.

Board decision

13 of the 13 Board members present agreed with the staff recommendation under the premise that the Standard would explain what is meant by ‘positive’ investment return.

B—Amendment to clarify that an entity need not separately disclose refunds of premiums

IFRS 17:100 requires disclosure of a reconciliation from the opening to the closing balances of the insurance contract liability. IFRS 17:103 requires an entity to separately disclose in that reconciliation investment components excluded from insurance revenue and insurance service expenses.

The Board tentatively decided to amend IFRS 17 to clarify the definition of an investment component, by stating that it is the amounts that an insurance contract requires an entity to repay to a policyholder in all circumstances. TRG members were concerned that this proposed amendment requires an entity to separate the amount payable when a claim occurs into:

  • The amount that would have been paid if the policyholder cancelled the contract (premium refunds)
  • The amount that would have been paid if the policyholder did not cancel the contract or make a claim (investment component)
  • The remainder (insurance service expense)

The staff is of the view that information about the insurance service result, including insurance revenue recognised in the period, would be obtained if the entity presented premium refunds separately or together with either investment components or premiums received.

Staff recommendation

The staff recommended to amend IFRS 17:103 to clarify that, in the reconciliation from the opening to the closing balance of the insurance contract liability, an entity need not disclose premium refunds separately.

Board decision

There was no discussion on this topic. 13 of the 13 Board members present voted in favour of the staff recommendation.

C—Amendment to clarify that changes resulting from cash flows of amounts lent to policyholders and waivers of amounts lent to policyholders are excluded from insurance revenue

When an insurance contract includes a loan component, the payment or receipt of amounts lent to and repaid by policyholders should not give rise to insurance revenue. IFRS 17 omits the exclusion of these amounts from changes in the liability for remaining coverage that give rise to insurance revenue.

Staff recommendation

The staff recommended the Board amend IFRS 17:B123(a) to add this exclusion and therefore clarify that those amounts are excluded from insurance revenue.

Board decision

There was no discussion on this topic. 13 of the 13 Board members present voted in favour of the staff recommendation.

D—Mutual entities issuing insurance contracts

Some stakeholders were concerned that with regard to mutual entities the explanations included in the BC) on IFRS 17 and the educational materials developed by the staff do not adequately reflect the nature of some mutual entities and might be used as prescriptive guidance for mutual entities applying IFRS Standards.

To address their concerns, those stakeholders suggested the Board clarify that the consideration in the BC on IFRS 17 apply only to some mutual entities and develop further considerations for the treatment of other types of mutual entities.

The staff think that it is clear that the BC on IFRS 17 only accompanies the Standard and does not set out IFRS requirements, nor does it define terms used in IFRS 17.

Staff recommendation

The staff therefore recommended the Board not amend IFRS 17 to develop specific requirements for mutual entities or amend the BC on IFRS 17.

Board discussion

Many Board members struggled with retaining the guidance in the BC. The term ‘mutual entity’ is applied differently in different jurisdictions and deleting the paragraphs or amending them to emphasise that they do not apply to all mutual entities would alleviate confusion. The staff replied that the requirements in IFRS 17 apply to all entities, whether they call themselves a mutual or not. Some Board members agreed with the staff that the BC does not state anything incorrect. They conceded that if the Standard had not been issued yet, the wording could be amended to avoid confusion, however amending existing paragraphs at this point could send a wrong signal, i.e. that a change was intended. Instead, more educational material could be issued after the amendments are finalised. The staff suggested to add a footnote to the basis to explain that not all mutual entities pay a residual interest to policyholders or simply stating that the term ‘mutual entity’ is not defined.

Board decision

13 of the 13 Board members present voted in favour of the staff recommendation under the premise that a footnote would be added to avoid any confusion in the BC.

Comment period for the Exposure Draft Amendments to IFRS 17 (Agenda Paper 2D)

In this paper the staff asked the Board whether they agree a comment period of 90 days for the Exposure Draft of proposed amendments to IFRS 17.

Board decision

There was no discussion on this topic. 13 of the 13 Board members present voted in favour of a 90-day comment period.

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